One of the greatest advantages to working for yourself through a home-based business is the many tax deductions that can be claimed against your federal tax obligations. Valuable information concerning the rules that apply to each of the following categories can be found on the IRS website. At the outset of the business, have a system for saving receipts and maintaining good documentation concerning every deduction. Some small businesses are audited every year, and the business owners with good records emerge from the audit easily while others end up paying additional taxes because expenses could not be proven. Many of the following categories will apply to most home-based businesses.
1. Home Office Space – When the home office is a separate space that is used exclusively for the business operation, that percentage of the total square footage of the home can be deducted as office space. Specific calculations apply and can be found on the IRS website. For certain types of businesses, the licenses to operate in the home must be acquired prior to claiming the home as a place of business. Check local and state regulations prior to the first day of operation to avoid disqualified deductions.
2. Services and Utilities – A phone line that is installed in the business office and used exclusively for business calls is deductible. Installation charges and monthly service charges can be claimed as deductions. All long distance charges can also be deducted. Cell phone accounts can be deducted as a percentage of the actual business usage. If the cell phone is used exclusively for business, the entire expense, including the cost of the phone, can be deducted. Utility expense to heat the office and the electricity to light the office can be deducted according to the percentage of the home’s square footage used for business.
3. Casualty Losses – If an event occurs that damages the home office, the cost of lost equipment and the cost of repairs can be deducted. Loss of business income can be deducted according to specific IRS rules. Consult a tax professional concerning which tax year these expenses can be deducted. When repairs cross a fiscal yearend, care must be applied to deduct actual expenses on the correct tax return. Keep copies of actual receipts and do not depend on cancelled checks for tax records.
4. Insurance Premiums – Health insurance premiums that are paid to cover anyone not eligible for a group plan can be deducted at tax time. Documentation should include actual bills that show the insurance premium amounts. Automobile insurance premiums can be deducted for the percentage of business use throughout the year. Document the odometer reading on January 1st and keep records every time the vehicle is used for business. The IRS rarely questions these deductions when written records exist.
5. Health Expenses – All medical expenses that were not covered by an insurance company can be deducted according to the IRS rules for that tax year. When the insurance deductible is above $1,000, the insured is eligible to establish a health savings account. This money is set aside before taxes are paid and can be used to cover the deductible, prescriptions, and any medical expense not covered under the insurance policy.
6. Automobile Expenses – Mileage can be deducted at the federal rate set at the beginning of each tax year as a percentage of overall mileage driven during the year. Careful records must be kept throughout the year to be accepted in a tax audit.
7. Travel Expenses – Business trips are sometimes essential to conducting business. Keep all receipts and research the limits placed on certain expenditures by the IRS. Travel that appears to be leisure will be questioned during an audit, so have documentation from meetings conducted if the location might appear to be for personal entertainment instead of business.
8. Research Materials – Training books and videos can be deducted as an expense. Receipts should show the actual title as proof that the materials are associated with the business.
9. Computer, Software, Supplies – Office equipment is depreciated and a portion of the cost of the equipment is deducted from the annual income. Specific rules apply to capital equipment instead of consumable supplies. Research the IRS rules prior to attempting to deduct expenses for office furnishings, equipment, and supplies.
10. Moving Expenses – When the business outgrows the home office, the cost of moving the business into a rented office space is deductible. If the family is moving into a new home, the cost of moving the home office is deductible according to specific IRS rules.
Careful record-keeping will prevent problems when an audit is required. Well-ordered records will make the auditor and accountant better able to see why each deduction was taken. When the business is just starting out, the start-up costs can be deducted. Refer to the IRS website for a complete list of qualifying deductions associated with starting a business.
This blog post was written by Tom who works at MoneyChoices.com.au, a website where Australians can compare a range of home loans and other financial products. Visit Money Choices to read more of his work.